Pivots and Portfolios: A Contrarian View

We live in turbulent times. We struggle to find ways to cope with this turbulence but many of our approaches only aggravate the situation rather than alleviate it. Case in point: portfolios and pivots.

These two approaches have gained strong champions as turbulence mounts. Portfolios have become a popular element of strategy for larger companies as they wrestle with growing uncertainty. Since the future is hard to predict, a growing number of strategists have embraced a portfolio approach – spread your bets across many different options in the hope that at least a few of them will produce large returns and cover the investment required to pursue multiple options.

Smaller companies, especially start-ups, don’t have the luxury of enough resources to pursue a portfolio of options so many of them have begun to embrace a different approach: pivots. If the company runs into unexpected roadblocks in entering a market, the pivot approach suggests that the best option is to quickly move to an alternative strategy, even if it means a 180 degree shift in direction.

Both of these approaches are examples of a broader philosophy that agility and flexibility are keys to surviving in uncertain times. Sense and respond quickly to any unexpected events that arise and you’ll be fine. Sounds very persuasive, perhaps even compelling.

Let me venture out onto the edge, though, and suggest that these seductive approaches are fraught with peril. They distract many of us from the real keys to success in times of growing uncertainty. In these times, distraction is the biggest risk because it reduces our ability to focus on what is truly important.

Portfolios - spreading your bets

Let’s look at portfolios first. This appears to be a compelling way to manage the risk of uncertainty. After all, it’s what venture capitalists and financial investors do all the time to manage risks. Why shouldn’t executives do the same, especially if they have sufficient resources to spread across multiple initiatives? Conceptually, this sounds very compelling but in practice I’ve seen many problems with this approach.

First, there is a temptation to place too many bets, as many as resources will permit. The more bets that are on the table, the greater the probability that at least some of them will pay off. As a result, resources are often spread far too thinly, with none of the initiatives having the critical mass of resources required to be successful.

To complicate matters, the executives in charge of the core of the business have great power and they use this power to minimize the resources that would be siphoned off to a portfolio of new initiatives. So, even the largest companies end up having limited resources to invest in the portfolio.

That’s just the beginning of the problem. Because there are many bets, a powerful psychology takes hold. If one of the bets begins to turn south, a complacency that sets in. The reasoning goes: not to worry, there are a lot more bets on the table so we don’t have to engage in extraordinary efforts to salvage the bet that appears challenged. Let’s just shift our focus to the other bets; one of them will surely pay off. In times of mounting performance pressure, this kind of complacency can be deadly.

The difference relative to venture capitalists and investors is that they are investing in companies with an executive team that will live and die based on the success of the venture. In a large company, the executive team of a failed portfolio bet will usually find a safe haven in some other part of the company if their initiative doesn’t succeed. After all, we all knew there was high uncertainty about success when the bet was made.

Pivots - shifting your bets

Pivots have a similar kind of psychological challenge. If we are ready to quickly and fundamentally change course when the going gets rough, we are much less inclined to invest the time, energy and resources in problem solving when confronted with unexpected challenges. We know the future is highly uncertain. We guessed wrong, so let’s move on to a new approach and try that for a while. Surely, the next pivot will be more successful.

The bottom line issue with both of these approaches is that they tend to undermine commitment to any particular course of action, or even any particular view of how a market or arena is likely to evolve. So, what’s wrong with that?

Magnifying risk rather than reducing it

What’s wrong is that we fall prey to one of the greatest risks in times of uncertainty. We become distracted by surface events and lose our focus on the fundamental forces that are shaping our surroundings. The more we pay attention to surface events, the more likely we are to shorten our time horizons and spread ourselves too thinly in a vain attempt to respond to the latest unexpected developments. We lose our ability to prioritize – everything seems to have equal urgency. In a turbulent sea, the worst thing that can happen is that we get buffeted from surface wave to surface wave and lose any sense of the direction of underlying currents that might carry us to safety.

There’s another price to be paid by these seductive approaches to growing uncertainty: loss of trust and the erosion of long-term relationships that are critical to accelerating learning. If you communicate through your actions that you lack the conviction or courage to pursue a given path, why should anyone else commit resources to support your journey? With pivots and portfolios, one also loses any potential to harness the increasing returns that are a key reward in an increasingly networked world.

Stay focused on fundamental forces

So, if portfolios and pivots are dangerous, what are our options? First, we need to invest the effort required to pierce below surface events and understand the fundamental forces that are shaping the turbulence we experience on a daily basis. It’s surely not easy – those forces are deep and often hidden from view. They certainly will not be discerned from the daily headlines that compete for our attention. These forces also extend well beyond any market or industry that we are targeting.

But the rewards are worth the effort. The direction and often the timing of these fundamental forces are often much more predictable than the surface events that seem to come out of left field on a daily basis. For example, look at both digital technology and demographic forces that are re-shaping the world we live in. There is reasonable certainty that the key foundations of digital technology – computing, storage and bandwidth – will continue to experience exponential improvement in price/performance for the foreseeable future.

On the demographic front, it is predictable that we will experience a rapidly aging population in developed economies and that the bulk of the younger generation globally will be concentrated in developing economies. We also have reasonable certainty that the accelerating urbanization movement will continue on a global scale.

As we shift our focus to these fundamental forces, we can begin to identify the key assumptions we are making about these forces and proactively scan the horizon for early indicators that would either confirm or call into question these assumptions. Since these fundamental forces will over time shape a much broader array of surface events, we begin to develop an important set of leading indicators that can help us to anticipate changes that might disrupt our strategies and market positions.

Use scenarios to assess uncertainty

Scenario planning can help to systematically assess the likely impact of variables that are more uncertain and frame a likely set of alternative futures. This provides a useful context to assess the potential robustness of major options in strategic direction – how well would these options fare in each of the scenarios that have been defined? In assessing the likelihood of potential scenarios, it is important to ask what initiatives we might be able to pursue that would materially alter the probability of outcomes that our more favorable to us. One of the biggest errors in scenario planning is to treat probabilities as a given rather than something that can be shaped by our own actions.

Pursue a FAST strategy

By deploying a FAST strategy framework, we can then begin to operate on two horizons simultaneously – defining a ten to twenty year strategic direction shaped by these fundamental forces and a much more short term set of initiatives over the next six to twelve months designed to accelerate our movement towards the longer-term strategic destination. Rather than a portfolio of initiatives, these are a set of mutually reinforcing initiatives with near-term milestones that can be used to test and refine our understanding of the fundamental forces affecting our markets and industries. They set into motion a set of feedback loops that accelerate our learning.

Rather than pivoting, we can periodically step back and reflect on our progress, then rapidly iterate and enhance the initiatives we are pursuing to achieve near-term impact. By constantly zooming out and zooming in, we maintain focus on what is really important and avoid spreading ourselves too thin. Within the context of a stable framework, agile methodologies of rapid iteration and learning can become powerful vehicles for progress.

The bottom line

There's no doubt that we’ll frequently encounter unanticipated obstacles or challenges as we pursue our strategic direction. But these obstacles and challenges are an opportunity to learn and gain greater insight about the forces shaping our environment. If we surrender too quickly and either shut down the initiative or pivot in a fundamentally different direction, we lose the opportunity to learn and grow from our experiences. Learning generally requires engagement, struggle and reflection. To use the old cliché, “no pain, no gain.”

Portfolios and pivots make it far too easy to give up and sacrifice the deep insight that comes with learning. While they may offer the appearance of an escape from uncertainty, they ultimately lead us to become more and more mired in short-term shifts that drain our resources and reduce our ability to reflect and grow.

This is the core paradox: in a time of increasing change and uncertainty, we must be clear on what will not change. Those who succeed in maintaining focus while all those around them are progressively losing theirs will surely reap the rewards of persistence and harness the true potential of increasing returns.

Comments

Good article, John. I'm not sure it's a question of portfolios vs none. I agree that spreading resources too thinly is wrong, but that doesn't mean a portfolio approach is also wrong. Portfolios often arise because large companies identify lots of opportunities and want to pursue them. If they have a focus problem with innovation portfolios, they likely have the same problem with other elements of their business.

I agree with your point about the psychology. Large companies are inherently more conservative than start ups, so we shouldn't expect them to show the same "do or die" attitude. They do need to show more persistence rather than giving up too early. Narrower portfolios will help with this.

The approach to portfolios can learn from small entrepreneurs. Firstly, I agree there should be more focus on a number of options that can be resourced appropriately. Second, allocate leaders who are passionate about the options. Third, learn as much as possible, as soon as possible. Last, rely more on judgment and belief and less on "facts".

I think pivoting is less of an issue with large companies; after all, they have more options!

A startup that does a good pivot isn't just taking a random new approach; typically the market has told it what its true strength is and it's responding accordingly. For instance, Game Neverending contained a photo-sharing feature that turned out to be more popular than the game itself, and it became Flickr while the game was shelved.

And for a startup, a "ten to twenty year strategic direction" is not an available alternative.

Good post John. I think that both approaches still have value - but only in the correct context, the classic complex systems story. Pivots still make sense in very early stage startups, but are dangerous in more established organisations, for exactly the reasons you lay out.

I think that the critical issue with the portfolio approach is that it works across a programmatic approach to learning/experimentation. So you can't build a portfolio like a financial investment portfolio, because then you run into the problems that you identify. But a narrow portfolio across a specific problem still makes sense, I think.

To me, the big problem here is seeing these tools touted as one-size-fits-all, and with fairly broad/fuzzy definitions.